Before we get to Higher One (ONE), we should note the recent action in CBOE. We published our view on CBOE on June 9th (read original post) and noted that the major stumbling block was the fact that our Intrinsic Valuation estimate of $27 suggested limited upside for investors.
Sure enough the investment bank analysts initiated the name Monday with neutral ratings and price targets ranging mostly in the high-20s. The shares have done what we would have expected and in this case we got broad confirmation from the banking analysts 40 days after investors had to make decisions.
This week we should see the banking analysts initiate coverage of Higher One, which appears greatly undervalued based on our analysis. If we are right the stock should move up further from these levels.
Higher One is taking advantage of the payments and related financial services market in higher education. Anyone who has had the pleasure of waiting in line at the bursar’s office knows how much this area needs some creative destruction.
This slide from the IPO roadshow summarizes what the company does. First and foremost, the company handles the disbursements to students. The company has built additional basic banking services around this and recently acquired CASHNet to provide a total payment solution to families for handling their school-related payments.
By focusing on high education, the company has been able to provide a richer set of services than the proven but rather generic and simple offerings banks have offered to students in the form of “starter banking” accounts and credit/debit cards.
Taking financial aid disbursements and college payments electronic is a major step forward in terms of speed, efficiency and convenience. Because some of these payment systems are specialized and not that easy to interface with, it creates a business opportunity that Higher One has exploited.
From an investment point of view, we know that investors struggle with how much Higher One is an innovative technology-focused company versus simply being a vertically oriented payment processor. We think that over the last decade this distinction has lost some importance. Is PayPal a technology company or a financial company? Is Intuit (INTU) a technology company or a financial company? Financial Engines (FNGN)? Morningstar (MORN)? Visa (V)?
From our standpoint, we see more technology innovation and service delivery than banking. In fact, Higher One partners with a bank holding company to actually handle the student assets and they do not originate student loans either. So Higher One is in a position to automate and streamline the process while collecting fees, much as some of the companies above do. For example, Morningstar makes investing in mutual funds easier although they don’t offer them, and PayPal makes doing business online easy although they don’t own any online businesses (although eBay (EBAY) owns a part of them…hmm). Going further, OpenTable (OPEN) is changing the restaurant business without a kitchen.
The stock continues to be very undervalued based on our analysis. Our Intrinsic Value estimates center around $20 using different scenarios. With the shares still under $14, we think this is a story that investors will be interested in as the company gets additional research coverage.